Possible Conflicts for Doctors Are Seen on Medical Devices

As an assistant professor at the Louisiana State University Health Sciences Center in Shreveport, Dr. William Overdyke oversaw operations to replace worn-down knees. From 2000 through the middle of 2001, whenever a patient needed an artificial knee, he or the residents he supervised implanted one made by Sulzer Medical, state documents show.

Dr. Overdyke has said that he used the Sulzer implant because it was the best available. But Louisiana state officials say he had another incentive as well: the $175,000 a year that he stood to make from contracts with the company. The contracts called for him to consult on product design and "promote and educate other surgeons" on the virtues of Sulzer products.

Before signing with Sulzer, Dr. Overdyke said, he had never used the company's artificial knee. Earlier he had a contract with another company, Wright Medical. And during that time, he and his residents largely used Wright's artificial knees.

Dr. Overdyke paid $10,000 in fines after investigators determined that his consulting arrangements with Sulzer were an improper conflict of interest under the state ethics code. Hospital officials said they had been unaware of his relationship with the company.

Yet in a variety of ways, many doctors have unusually close, if largely unseen, ties to device makers. And those relationships are a central issue on an emerging battleground in the health care wars: the upward cost spiral of implantable medical devices.

Countless patients have been helped by these new technologies -- artificial knees that allow aging weekend athletes to play on, stents that help keep once-clogged arteries clear, defibrillators that correct potentially fatal heart arrhythmias.

But the rising cost of the devices and the relationships between doctors and manufacturers are causing profound concern among hospital executives, health care economists and other experts, mirroring recent reactions to the way pharmaceuticals are marketed. In the last two years, Medicare payments to hospitals for implant surgery have risen about 40 percent, from $10 billion to $14 billion, according to an analysis of Medicare records. And federal prosecutors have begun to investigate some device makers' deals with doctors, trying to determine if they amount to payoffs for using a product.

Among the loudest objectors have been hospitals, which buy the devices and most immediately feel the pain. But health care economists stress that consumers and insurers are also hurt by the rising cost of medical technology, including implantable devices.

"We're paying for it, but no one can see it," said Paul Ginsburg, president of the Center for Studying Health System Change, a research group in Washington.

The device companies occupy a privileged corner of the medical economy, where many of the checks and balances that have come to govern health care costs simply do not apply. Hospital officials and health care experts say the companies have used their relationships with doctors and a climate of secrecy to ensure that their products remain unusually profitable.

Central to this equation are the surgeons, who typically decide which devices are used yet bear no financial burden for their costs. Hospitals, which do bear that burden, have been reluctant to challenge doctors about their choices and are mostly in the dark about the inner workings of the marketplace. One large device company, Guidant, has even sued two hospital consultants because they divulged pricing information to competing hospitals.

Prices paid by hospitals vary widely, yet information is so scarce that hospitals say they are often unaware if they are overpaying, and impotent to negotiate a better price. Many hospital executives say some orthopedic and cardiovascular operations, once a major profit center, have become a marginal, even money-losing, endeavor.

Nor do the hospitals generally know which of their doctors have relationships with the device companies and if so, the details of those arrangements. In addition to six-figure consulting agreements that also pay doctors to promote a given device, companies pay royalties on new devices, send doctors to educational conferences, sponsor fellowships and provide unrestricted grants.

The device companies' trade association, AdvaMed, says the industry is highly competitive and spends heavily on innovation. As for the consulting contracts and other benefits, the companies and doctors say they are intended not to buy loyalty but to pay for research and training and for the help doctors provide in designing these sophisticated devices.

Two years ago, AdvaMed approved a voluntary code of ethics that recommends limiting the value of company gifts to under $100 and hiring consulting doctors for their expertise, rather than their abilities to generate the most business.

"If there have been inappropriate payments made, I think companies regret that, and that's why they have been aggressive in implementing this code of ethics," said Blair Childs, an AdvaMed executive vice president.

The president of the American Academy of Orthopedic Surgeons, Dr. Stuart L. Weinstein, says that since doctors are responsible for most of the innovations in medical devices, "There have to be these close relationships between surgeons and industry." What is important, he adds, is that these relationships are aboveboard and disclosed to the patient, and that the doctor chooses the best device for that patient.

In March, the United States attorney in Newark issued subpoenas to five orthopedic implant companies, asking them about their consulting agreements and other arrangements with doctors. "A number of investigations are under way," said Lewis Morris, chief counsel to the inspector general for the Department of Health and Human Services.

The question for investigators, he said, is whether the companies and the doctors have crossed a line from legitimate compensation for valuable services rendered in the development of the devices to unethical payoffs for securing competitive advantage in a crowded marketplace.

"The potential for inappropriately steering medical decisions is always at play, and there is always the risk that doctors will prescribe a particular device because of their own financial interest and not the interest of the patient," Mr. Morris said.

In the modern health care marketplace, prices and fees are increasingly determined by negotiation. Yet when it comes to implantable devices, that dynamic often barely exists. Even though the Lee Memorial Health System in Florida is one of the nation's busiest joint replacement centers, James R. Nathan, the system's chief executive, says he has little leverage negotiating discounts. The marketplace, he says, "doesn't work."

Part of the blame lies with the hospitals, which often seem to lack the financial sophistication needed to negotiate lower prices for these devices. While hospitals have been successful at cutting costs for standard supplies like light bulbs and bandages, many hospitals' accounting systems are so inadequate that they have little idea what they actually pay for more complex devices, said Dr. John Cherf, a knee surgeon with a business degree who consults with hospitals and health care businesses.

With manufacturers guarding pricing information closely, the price of a given device can vary by thousands of dollars from one hospital to the next. One hospital in the New York area, for example, paid $8,000 more for a DePuy hip than a competitor, according to a recent survey by the Greater New York Hospital Association.

"It's almost been a black box around it, what people pay," said Timothy Glennon, an executive with the association, which is now examining prices for cardiac implants.

Prices are soaring. A defibrillator now runs as much as $35,000; the price of the latest artificial knee approaches $10,000. A single screw used in spinal surgery can cost as much as $1,600. In all, in the last two years alone, spending on implant surgeries by Medicare, the federal insurer for the elderly, increased twice as fast as the program's spending over all, according to the Medicare analysis by Orthopedic Network News, an industry newsletter.

Rising prices have made device companies unusually profitable: according to an analysis by Medicare, they enjoyed net profit margins of nearly 20 percent at the end of 2003, more than twice the average for the Standard & Poor's index of 500 companies.

The hospitals, though, say they are finding themselves squeezed, as rising costs outstrip any increases in reimbursement. While the average price paid for a hip or knee implant has climbed by about two thirds since 1995, according to estimates by Orthopedic Network News, reimbursement from Medicare, which pays for the bulk of these operations, has not increased.

Hospital officials also argue that the constant introduction of new, and more expensive, models can have less to do with innovation than with the appearance of innovation. While some higher prices are a result of clear improvements, like a drug-coated stent that helps reduce scarring that can block an artery, hospitals say many new models offer no significant upgrades and sometimes are too sophisticated for patients who get them.

Dr. Calvin Weisberger, a cardiologist for the California health plan Kaiser Permanente, says an enhanced single chamber defibrillator costs $5,000 to $8,000 more than a basic model. "The average patient does not need all of the bells and whistles," said Dr. Weisberger, who helps the plan's doctors and hospitals evaluate new devices.

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Asked about the range of prices, the companies say it reflects a variety of business considerations, including volume. And Mr. Childs, the executive with the device-makers' trade group AdvaMed, argues that the hospitals' overall costs have not gone up significantly, because improvements in these devices let doctors operate faster and patients go home sooner. Medicare payments largely reflect the hospitals' overall costs, he said.

Doctors, Mr. Childs says, do consider price when choosing implants. "Physicians are a very discriminating customer," he said. "It's not like you're selling to a bunch of stooges."

Financial Ties

For the device companies, the most important relationship is with the doctors, and they spend considerable money and energy nurturing it. "The vendors work hard at these relationships," said Ed Epperson, chief executive of Carson-Tahoe Hospital in Nevada. The extent and precise nature of the relationships remain largely hidden. The companies and doctors are unwilling to discuss specific arrangements. Hospitals are often unaware of them, because the doctors using their operating rooms and admitting patients are usually not employees. Even academic medical centers may require the disclosure of financial ties only if a doctor is conducting a clinical trial.

Even so, a range of relationships begins to emerge from a review of published research, court papers and other government documents. And perhaps the clearest available view comes from the case of Dr. Overdyke in Louisiana.

Dr. Overdyke had been a consultant for Wright Medical, which paid him $150,000 to $200,000 annually, according to his deposition. His arrangement ended in 1998, and he soon became involved with Sulzer; at about the same time, a distributor to the hospital, MD Medical, also changed its representation to Sulzer. A founder of MD Medical later became Dr. Overdyke's wife.

The contract with Sulzer paid Dr. Overdyke $75,000 a year to consult on the design of two products, including a refinement on one of its Apollo knee systems, and to "promote and educate other surgeons on the benefits" of these devices. He also signed two royalty agreements in 2001, each providing advances of $50,000 a year on products not yet being marketed.

Over two years, the state university spent nearly $200,000 on Sulzer orthopedic products. Dr. Overdyke said he never told the residents which brand to use. Asked why the residents chose Sulzer, he replied, "You'll have to ask them."

Dr. Overdyke was never accused of directly profiting from using Sulzer implants. But the hospital says his ties to Sulzer represented a clear conflict of interest under Louisiana ethics laws, which forbid state employees from doing business with companies with which they have financial ties. He left the hospital in 2001; the hospital says it did not renew his contract for reasons unrelated to his relationship with Sulzer.

Dr. Overdyke and his wife declined to discuss the case, their lawyer said; Zimmer, which has since bought Sulzer's business, also declined to comment. But the counsel for the state ethics board, R. Gray Sexton, said the case "involved conditions routinely tolerated" in private hospitals across the nation.

Mr. Epperson, the Nevada hospital executive, says he sees some parallels to the practices employed by pharmaceutical companies, which have been criticized by consumer groups and regulators for trying to influence doctors with a variety of benefits.

In addition to consulting and royalty agreements, the device companies send doctors to educational conferences about their latest models. They provide financing to medical associations. DePuy, a unit of Johnson & Johnson, paid for a one-year foot and ankle fellowship at the University of Virginia Health System and financed a Web site for an orthopedic surgeon in Tulsa, Okla.

A DePuy spokeswoman said these payments helped educate surgeons and patients. Indeed, the device companies say their relationships with doctors differ from the drug makers' because the surgeons are intimately involved in perfecting new devices and techniques. The companies finance much of the clinical research in the field. And while a general practitioner may not need to go to Europe for a meeting on the latest painkiller, a surgeon using an artificial spinal disk for the first time may need training in how to implant it.

Still, hospitals say that the closeness of these relationships makes it almost impossible to enlist the physicians in the battle for better prices. Dr. Cherf, the knee surgeon, says the device industry has "done a brilliant job" exploiting the erosion of the traditional alliance between hospital and doctor. At the same time, hospital administrators and consultants say hospitals often hesitate to question surgeons' decisions, since the doctors are a main source of patients and revenue.

One hospital that did protest was Grant Medical Center in Columbus, Ohio, which in 2003 sued Biomet and one of its distributors, saying the distributor had tried to take advantage of an important orthopedic surgeon's insistence on using Biomet's implants.

The surgeon, Dr. Adolph V. Lombardi Jr., performed about 1,200 joint replacements a year at the hospital, according to the lawsuit. Grant Medical said the distributor had offered an ultimatum: pay 35 percent more or purchase a service agreement worth several hundred thousand dollars.

While the lawsuit noted that Dr. Lombardi was conducting a clinical trial for Biomet, he also has financial ties to the company. He was a consultant and received royalties from Biomet, according to a 2004 disclosure statement. The foundation for a new hospital that he helped start owned $318,000 in Biomet stock, the foundation's 2003 public filing showed.

The case was settled; Dr. Lombardi, the hospital, company and distributor all declined to comment.

There is another central figure helping cement the company-doctor relationship: the sales representative. Because hospitals cannot afford to purchase the devices ahead of time, the representatives are often present during operations, sometimes helping the surgeon decide which implant to use.

Many hospital executives see that operating-room role as a potential conflict of interest, since the representative has every incentive to push the most sophisticated, and expensive, device. The representatives work on commission -- as much as 10 to 20 percent -- and can make as much, if not more, from an operation than the surgeon, industry consultants say. Representatives frequently make several hundred thousand dollars a year.

One former salesman said that to encourage a surgeon's loyalty, he used to pay the doctor's assistant $200 a case. "It was a bonus they didn't have to pay with their money," said the representative, who insisted on not being identified because he still works in the industry and fears retribution.

The Justice Department's investigation is seeking to determine if some of the companies' agreements violate federal laws barring doctors from being paid directly by device makers for using a certain implant. People in the industry said they believed that prosecutors were assessing whether doctors who were paid most under these arrangements were also the heaviest users of a company's implants.

Federal authorities had already been looking into sales practices at Medtronic's Sofamor Danek unit, which sells spinal implants. Now the inquiry has broadened to much of the orthopedic-implant industry, with the subpoenas to Stryker, Johnson & Johnson's DePuy unit, Zimmer, Biomet and Smith & Nephew. The companies say they are cooperating.

A Rebellion Develops

A rebellion has begun on several fronts.

Some hospitals are trying to align their interests more closely with those of their doctors. Some have begun meeting with doctors to decide which devices to buy. Others are discussing sharing savings from more efficient purchasing; HCA, the nation's largest for-profit hospital chain, is seeking federal approval for a plan to give its orthopedic surgeons 10 percent to 20 percent of such savings.

The device companies oppose this kind of arrangement, saying it could present an improper financial incentive to choose a certain device. "I want to know my doctor is my advocate," said Mr. Childs, the trade association executive.

The hospital industry says that one essential factor for ending the cost spiral is the free exchange of information about prices. Some hospitals are relying on consultants like Amerinet and MedAssets, which provide information about what other hospitals are paying.

These efforts at transparency are drawing fierce resistance. A major device maker, Guidant, has sued two consultants, including a unit of MedAssets, accusing them of sharing confidential price information. MedAssets countersued, saying Guidant has tried to buy doctors' loyalty through consulting agreements and other inducements.

Each has denied the other's charges. The suit against the second consultant, Byrne Healthcare, has been settled.

With the Justice Department's inquiry looming, some people in the industry say change is inevitable. "It's a broken system," said DeNene Cofield, the administrator who oversees surgical services for Medical Center East in Birmingham, Ala. "And at some point, it will fall apart."